At issue is whether exchanges sometimes allow high-speed trading firms to trade ahead of less-sophisticated investors, potentially disadvantaging them and violating regulatory rules. The inclusion of Nasdaq and NYSE in this high-profile probe, and the role Mr. Bodek has played in it, haven’t previously been reported.
High-frequency traders use computer algorithms to place blizzards of buy and sell orders—many of which they instantly cancel—in an effort to detect and exploit the tiniest shifts in demand for stocks.
This kind of trading now generates some two-thirds of all share volume on U.S. markets. Critics worry that the flood of orders driven not by investors evaluating stocks but simply by computers makes markets increasingly vulnerable to incidents like the May 2010 “flash crash,” when stocks plunged hundreds of points for no evident reason, and this summer’s mess at Knight Capital Group Inc., KCG +0.39% when a trade-coding problem caused a $440 million loss for the brokerage firm.